3 Negative Drivers Inspiring Valeant Pharmaceuticals Intl Inc (VRX) Put Traders

Valeant Pharmaceuticals Intl Inc (VRX) stock is sharply lower, while its put options are growing more popular

Dec 14, 2016 at 2:00 PM
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Valeant Pharmaceuticals Intl Inc (NYSE:VRX) put options are popping amid a trio of negative catalysts. First, Wells Fargo cited the recently announced departure of three top executives as evidence of the drugmaker's "instability." Second, Bill Ackman's Pershing Square Capital Management trimmed its stake in VRX for tax purposes. 

Third, the Justice Department's probe into generic drug pricing has resulted in its first criminal charges. While not directly impacting VRX, the news is weighing on drug stocks more generally. At last check, Valeant shares had surrendered 4.2% to trade at $14.16, and earlier came within a chip-shot of a new six-year low.

As alluded to, activity has picked up on VRX put options today, at 1.5 times the normal amount for this point in the session. The out-of-the-money January 2017 12.50 strike has seen the most intraday volume, with nearly 2,700 contracts on the tape -- some of which were likely bought to open. For buyers, the goal is for the stock to tumble south of $12.50 by the close on Friday, Jan. 20, when the soon-to-be front-month option expires. The shares haven't explored territory that far south since early 2010.

Longer term, however, call traders have dominated VRX's options pits. The stock's 50-day call/put volume ratio at the International Securities Exchange (ISE), Chicago Board Options Exchange (CBOE), and NASDAQ OMX PHLX (PHLX) is 2.07, with long calls doubling puts. Moreover, this ratio ranks in the bullishly skewed 84th annual percentile.

The prevailing call-skew is reinforced by looking at short-term open interest levels. Valeant sports a Schaeffer's put/call open interest ratio (SOIR) of 0.59, which sits lower than all readings taken in the past year. In short, among options in the front three-months' series, open interest has never been so call-focused in the last 12 months.

But call traders aren't necessarily bulls. Nearly 11% of VRX's float is sold short, after the bearish bets jumped 12.5% in the most recent reporting period. So, short sellers may actually be behind the call buying, hedging their skeptical stock positions against an unforeseen breakout.

Finally, like Wells Fargo, the brokerage bunch in general is quite bearish toward Valeant Pharmaceuticals Intl Inc (NYSE:VRX). The underperformer has received just three "buy" or better ratings, compared to eight tepid "holds" and three "strong sells."

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